CBA Corner: Renegotiate and Extend

The majority of analytics work concerns player value, either directly or indirectly. Whether in macro terms of one-number metrics and/or value over replacement player calculations or in micro terms such as which player’s rebounds or blocked shots are the most impactful, these are all part of the effort to better understand, parse and demonstrate players’ abilities to contribute on the floor. This benefit accruing to the team which employs each player might be described in economic terms as a demand curve.

The goal of analytics, at least in an applied sense, does not end there. We are trying to improve decision making, and “value” is only one side of that equation. The other is cost. Getting back to the economics analogy, this is the supply curve. The Byzantine rule structure that is the NBA’s Collective Bargaining Agreement makes discussing this cost side anything but straightforward. So while CBA and salary cap analysis might not typically fall under the umbrella of analytics in common parlance, we at Nylon Calculus feel very strongly that ignoring this side of the equation is telling only half the story.

To that end, we’ve brought on one of the leading CBA experts in the public sphere, Nate Duncan, to help explore this space. While the nomenclature of salary cap minutiae and that of performance analytics differ greatly, to understand what players a team should target requires an understanding of both. Just as one can’t buy a house before knowing their budget, a team can’t simply shop in the luxury market if all it can afford is a doublewide. With Nate’s help, we hope to illuminate not just the “who” but the “how” and the “why” of which players teams end up acquiring. – SP

One of the main hallmarks of the 2011 Collective Bargaining Agreement has been teams’ inability to extend their star players due to the rule changes. In an effort to protect owners from giving out crippling extensions like those given to Richard Hamilton and Stephen Jackson under the previous CBA, the owners severely limited extensions under the new agreement.  

The new CBA restricted any extensions for veterans (i.e., players not coming off rookie contracts) to four years, including the current season. Because the “current season” in this instance continues until June 30, the longest extension that can be given before a player becomes a free agent is three years. Only contracts of four or more years may be extended, and that may only occur once three years has passed since the contract was last signed, extended, or renegotiated.

As a result, it makes almost no sense for any decent player who is not coming off a rookie contract to extend before becoming a free agent, because the player can receive a five-year new contract from his current team. Even if he signs elsewhere, he can still get a four-year contract with another team rather than only three years had he extended.[1. I’ve previously written on the issue of contract extensions here and here.

What’s more, an extension may only begin at 107.5% of the last year’s salary[2. The one exception: players who have been with the team 10 or more years may use 107.5% of the average salary of their current contract to start an extension, provided his salary decreased in the last year of the existing contract. The Thunder recently used this to give Nick Collison a higher extension than he’d have otherwise qualified for, but this rule obviously affects few players.], meaning players on bargain deals who deserve raises like LaMarcus Aldridge in 2015, Al Horford and Mike Conley in 2016, Russell Westbrook and Stephen Curry in 2017, and DeMarcus Cousins in 2018 effectively cannot extend for their market value.

The CBA’s limitations on extensions have arguably already resulted in at least two stars changing teams. Dwight Howard likely would have extended upon his trade to the Lakers in 2012, and Aldridge could well have done the same last summer with the Blazers had it made financial sense. Instead, unanticipated calamities befell their teams in the intervening year before free agency, leading them to sign elsewhere.[2. (Ed. – Additionally, Kevin Love’s first season in Cleveland would have been far less drama-filled in terms of his role, fit and relationship with LeBron James had there been a viable way for the Cavs and Love to formalize a mutually satisfactory contracts extension as a part of the trade which brought Love from Minneapolis.]

But the rising salary-cap, a projected $89 million in 2016 and $108 million in 2017, may provide teams with the temporary ability to prevent certain stars from reaching free agency in a way that makes financial sense for those players. This bonanza, along with the relatively weak free agent crop of 2016, may leave many teams with more cap space than they can effectively spend in free agency.

Rather than overpay for mediocre free agents, another option is available to teams: renegotiating and extending the contracts of underpaid stars who will be free agents in 2017 and 2018.  The concept is fairly simple.  Instead of spending salary cap space on outside free agents, teams may instead use that space to give rostered players a raise.  More importantly, this renegotiation can occur in conjunction with a contract extension starting at an amount based  off the new, higher salary.  

While a contract could still only be extended for a maximum of three new years, “new” money on the existing contract could be enough to entice players to forego the fourth and possibly fifth year[3. If re-signing with their current team.] of the new contract they could sign after reaching free agency.  What’s more, 2017 free agents would be able to get more money and lock in future contracts before a potential work stoppage in 2017, when both sides may opt out of the current CBA.  

Another reason for 2018 free agents to renegotiate and extend in the summer of 2017 is the projected 2018 salary cap.  Although this could very well be addressed by the upcoming CBA negotiations, the cap is currently projected to decrease from $108 million to $100 million that year[4.

The reasons why are somewhat beyond the scope of this article, but to summarize the cap is usually tied to league revenue. However, in the event of a shortfall in which teams do not pay out the required percentage of revenue to players, the remedy is to increase the cap the following year.  The league projects that teams’ spending will be unable to keep up with the cap in 2016, necessitating an artificially high raise in 2017 to compensate. In 2018, spending will catch up to revenue, causing a projected fall to a level commensurate with the projected revenue. Albert Nahmad of Heathoops.com explains in full.]. Players could face a much tighter market that year, and for stars the maximum salary for a contract signed in 2018 could be about $2 million lower than in 2017.

Not just any contract may be renegotiated.  In addition to the requirement that the team in question have the requisite cap space, renegotiations are only allowed on contracts of four or more years, and only after the third anniversary of the signing of that contract[4. Renegotiations also cannot occur between March 1 and June 30, but it is rare that a team will have enough salary cap space to do it by that time of year anyway.].

Consider a purely hypothetical scenario in which the Golden State Warriors had cap space in the summer of 2016 and worried about losing Curry the following year as a free agent.  The 27 year-old Curry is scheduled to make a mere $12.1 million in the last year of the biggest bargain contract in the league.  With sufficient room, Golden State could renegotiate Curry up to his projected 2016-17 maximum of $25.1 million, and then offer him a three-year, $87.2 million extension on top of it.  That is a total of $100.2 million in new, guaranteed, money, with the benefit of locking it in a year earlier to mitigate against the risk of injury.

If Curry were a free agent in 2017, the most he could receive from another team would be a four-year, $130.3 million deal that would pay him $95.7 million over the first three years, $4.5 million less than he would make in new money from a renegotiation and extension. What’s more, the Warriors could offer him a player option on the third year of the extension, allowing him to become a free agent again at the age of 31 (with eligibility for a higher tier of maximum salary as a player with 10 plus years’ experience) should he so choose.

While renegotiating and extending would not be a no-brainer for Curry in this scenario, the $13 million in otherwise unattainable new money in 2016 gives him some real reason to think about it.

Of course, the Warriors example also provides a great look at why renegotiations have been so rare.  They are unlikely to have the cap space to give Curry a raise to the maximum. Even if they did, the opportunity cost of renegotiating Curry rather than using the space on new players is probably too high for a team that should be right in the championship mix over the next few years.

Renegotiation might make more sense for teams a bit further from contention who could not realistically hope to acquire a premium free agent in 2016 and 2017.  Teams earlier in the success cycle could not only use renegotiation to retain a star, but also to shift contract money for veterans into earlier cap years.  While raises or decreases are normally limited to a maximum of 7.5 percent per annum[5. 4.5 percent when signing with another team or for non-Bird free agents.], the salary in the first “new” year of an extended and  renegotiated contract may decrease as much as 40 percent from the renegotiated salary.  This method allows teams with cap space to frontload contracts at a time when their young players might be cheaper, then recoup that space on the back end at a time when more cap flexibility is needed.

Thus, renegotiations and extensions could be a powerful tool to soak up cap space that otherwise might be poorly utilized. In fact, the Denver Nuggets have already employed it this year to extend Danilo Gallinari and Wilson Chandler. In a forthcoming piece, I’ll examine the teams and players for whom the renegotiation and extension tactic would make the most sense in the years to come.